Supply chains have undoubtedly an immense impact upon the environment while at the same time they are constantly influenced by environmental risks such as climate change.
According to a recent report published by CDP , there is a great need for companies to address environmental risks by engaging actively with their supply chains. As environmental supply chain risks are expected to cost up to $120 billion over the next five years supply chain transparency practices will allow businesses to remain competitive, resilient as well as relevant in a rapidly changing world.
What it is, why it matters and how it is linked to sustainability
A supply chain is a network between a company and its suppliers to produce and distribute a specific product to the final buyer. Supply chain management has always been a crucial process for companies since an optimized supply chain results in lower costs and a faster production cycle.
When it comes to sustainability, it has been pointed out that a company’s entire supply chain can make a significant impact in promoting human rights, fair labour practices, environmental progress and anti-corruption policies. In a more practical note, managing efficiently the potential, social, environmental and governance risks across the value chain can provide a company with a longer-term competitive advantage vis a vis its competitors as well as can lead to increased trust amongst its key stakeholders.
According to the UN Global Compact’s participants, supply chain practices are considered one of the biggest challenges to improving a company’s sustainability performance. To achieve more efficient and sustainable supply chains, a company needs to become more transparent with regards to its supply chain practices and start monitoring, measuring and evaluating its entire business’s impact.
According to GRI, working towards a more sustainable supply chain, it is vital to track and monitor the origin of products and services and account for their environmental impacts. Many companies implement sustainability programs, incorporate supply chain best practices, and assess their suppliers’ environmental performance. Companies need to engage their suppliers in their business processes, communicate their values and expectations in sustainability efforts, and encourage disclosure, transparency, and continuous improvements to build resilient supply chains.
Increased demand for supply chain transparency
Risk management in the supply chain is a common practice for most industries. Supply chain risk management helps reduce disruptions from environmental impacts while protecting the company’s operations and brand. Suppliers having effective compliance programs and robust management systems help enhance the reliability and efficiency of the supply chain, which adds value to the business.
In 2020, with increased demand for greater transparency of supply chain impacts, the number of supplier companies disclosing their supply chain data, according to CPD, increased by 16%. GRI standards help companies disclose their supply chain practices. GRI 204: Procurement Practices 2016, focuses on how the organization supports local suppliers by building a complete picture of their impacts throughout the supply chain.
Issues such as toxic waste, water pollution, biodiversity loss, deforestation, long-term damage to ecosystems, hazardous air emissions, greenhouse gas emissions, and energy use are all linked to the environmental aspects of supply chains. Environmental risks from supply chains are expected to occur due to climate change, water-related impacts, and deforestation. The increased risk is also associated with physical impacts, regulatory and market changes to address environmental risks, and increased raw material costs.
Key findings of 2021 Global Supply Chain Report
The 2021 Global Supply Chain Report that was released by CDP under the title “Transparency to Transformation: A Chain Reaction” analyzes data from 2020 CDP disclosures of over 8,000 suppliers showcasing that environmental supply chain risks will cost up to $120 billion over the next five years.
The report predicts that the highest potential cost increase will occur in the manufacturing sector, followed by the Food, beverage & agriculture, and power generation sector. Buyers will face significant costs due to environmental risks in supply chains, which are expected to increase as the planet, society and economy change. As supply chain companies operate with tight profit margins, the increased costs from environmental risks will be passed on to buyers and, ultimately, to consumers.
The CDP Supply Chain program brings together a diverse group of more than 150 major purchasing organizations representing more than $4.3 trillion in purchase spending to address these risks. These companies require their suppliers to disclose their environmental data through the CDP annually. With CDP, companies can measure and influence how their suppliers integrate climate change into their operations. This data will assist buyers in purchasing decisions and supplier engagement and thus build resilient supply chains.
Although in 2020, the number of buyers requesting disclosure through a CDP increased by 24%, only 14% of suppliers responded to their request. As for climate change, companies are still slow to drive change as only 37% of suppliers engaging with their suppliers, down from 39% in 2019.
The benefits of engaging with one’s value chain
There is a great need for companies to address environmental risks by engaging actively with their supply chains.
Supply chain transparency and addressing environmental issues and risks will help companies reduce costs and improve reputation.
CDP suggests engaging suppliers through:
- Ask Questions: Ask your suppliers to assess their environmental data and report it to you through CDP’s disclosure system. Through regular disclosure, you can identify risks and opportunities and begin to collaborate to build resilience.
- Collaborate with others: Look for opportunities to collaborate with peers, investors, and other stakeholders who influence your suppliers’ behaviours.
- Set public targets for the supply chain: Setting targets publicly helps clarify targets related to climate, deforestation and water security, thus contributing to a clear shared pathway.
- A chain reaction: ask your suppliers to engage with their suppliers. By driving disclosure requests, setting goals, and collaborating across your suppliers’ values, you protect your own business.
Towards more efficient supply chains
The climate change crisis and other environmental issues require strong action from the business community to achieve ambitious climate and environmental goals. Supply chain actions are key to building a resilient and prosperous economy. Businesses play a critical role in the transition towards a sustainable economy and net-zero by engaging their suppliers on climate change.
Companies need to drive climate action and supply chain transparency by putting them at the top of their agenda and including them in their climate action strategy. Besides, more buyers need to encourage good leadership practices among their suppliers and encourage transparency with their value chains.
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